Why You May Never See Another Deal Like This

Few investors come close to matching the exceptional returns of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) mastermind Warren Buffett. But as shareholders ponder the mortality of the 80-year-old super-investor, you have to wonder whether his future deals will ever match up to some of his biggest wins.

One of Buffett's boldest calls came during the financial crisis. While many investors stared blankly into the abyss, Buffett remained staunchly confident in the future of the U.S. stock market -- and put his money where his mouth was.

The end of the last great investment
Last Friday, Berkshire shareholders got some bad news. Goldman Sachs (NYSE: GS  ) announced that it was electing to redeem the preferred shares it had issued to Berkshire in September 2008 after the collapse of Lehman Brothers during the financial crisis. In exchange for giving Goldman $5 billion in badly needed capital, Berkshire received 10% annual preferred dividends for as long as Goldman left the preferred shares outstanding.

The reason the redemption news is bad for Berkshire is that it stops the clock on an investment that was netting it more than $1 million per day from Goldman. But you don't need to feel too bad for Berkshire; Goldman is paying $5.65 billion to redeem the shares, and combined with dividends already paid, Berkshire will end up with about $1.7 billion in profit on the preferred shares.

Moreover, that's not even the most lucrative piece of the package. Berkshire retains warrants to buy another $5 billion in shares at the now-bargain price of $115 per share. With the stock now trading at $160, the warrants have paper gains of nearly $2 billion -- and they don't even expire until 2013, paving the way for potentially even greater gains.

Goldman's move follows General Electric's (NYSE: GE  ) announcement a few months ago that it intends to redeem its $3 billion in preferred shares by this October. Buffett stands to make $1.2 billion on that deal even if GE shares fail to recover to the $22.25 price specified on Berkshire's GE warrants.

Big returns with low risk
As my colleague Morgan Housel points out, when you set aside the huge figures involved, the percentage gain that Berkshire earned wasn't spectacular. In fact, if you'd waited just a bit longer to buy, you could have done better simply by investing in a broad stock market index fund.

But that conclusion ignores the risk side of the risk-reward equation. By taking preferred stock, Buffett secured the chance for a substantial recovery even if common shareholders had been completely wiped out. Meanwhile, the warrants gave Berkshire participation in the stocks' upside. Goldman and GE common shareholders can only dream of the gains that Buffett has made from their respective companies -- arguably at their expense.

What the future holds
Berkshire shareholders shouldn't count Buffett out yet. He clearly remains determined to put his vast cash resources to work with the best opportunities he can find. His recent announcement that he's buying lubricants maker Lubrizol (NYSE: LZ  ) is just the latest of a string of buyouts of solid, cyclical businesses with exposure to expanding global markets. And he clearly hasn't given up on the chance to make more profits from the financial sector, with large investments in Wells Fargo (NYSE: WFC  ) and American Express (NYSE: AXP  ) .

What Buffett may never see again, though, is a situation in which investment sentiment is so unqualifiedly negative that he has an opportunity to stand as the capital source of last resort to companies that just a few years earlier had been seen as among the most solid blue-chip stocks you could buy. You may never see another deal like the one Buffett made with Goldman, but you might well see some even more profitable ones before the Oracle of Omaha gives up the ghost.

Add Berkshire Hathaway to your watchlist and get all the latest on the Oracle of Omaha as it happens.

Fool contributor Dan Caplinger loves a good deal. He owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value and Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you the deal of a lifetime.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 21, 2011, at 10:50 PM, vidar712 wrote:

    What about the risk of not providing Goldman Sachs with additional capital?

    Would a Goldman Sachs bankruptcy been damaging to his existing investments?

  • Report this Comment On March 22, 2011, at 8:01 PM, beechtree1 wrote:

    Goldman Sachs bankruptcy would have been

    damaging to everyone's investments, make no

    mistake about it.

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